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In the maelstrom of the financial upheaval, banks suffered a battering not just to their balance sheets but to reputations.
The mix of accusations – of excessive risk-taking, inflated rewards and poor controls – added to government bail-out billions and hostile public opinion forced banks to take decisive action.
At Freddie Mac and Fannie Mae, the US mortgage enterprises that senators pronounced “too big to fail” and which together oversee more than half US mortgages, changes are under way.
Donald J. Bisenius, executive vice-president of single family credit guarantee at Freddie Mac, says: “When the financial meltdown began, three things significantly improved the quality of the business.”
First, policy changed: “We looked at credit policies, the types of loan we buy and the parameters. We found that it was not so much individual payments, but the risk-layering. So we eliminated non-traditional products.”
Now, Freddie Mac requires “full documentation on all loans” it purchases. To test their quality “we require lenders to sample a greater number of loans”.
Along with stricter policy rules, Freddie Mac heightened scrutiny of the underwriting process, checking that lenders assessed borrowers more thoroughly.
“We asked how were they evaluating credit,” says Mr Bisenius. “We tightened up a number, and extensively trained them. It wasn’t that they were wrong, but that specified processes weren’t being followed.”
Training proved crucial to stabilising losses: “We reviewed the process and went out to lenders, and tried to educate and train them more fully on what our requirements are.”
As well as dedicated inhouse trainers and online training, Freddie Mac provides onsite training to lenders, tailored to their specific needs.
As a result, the business has now recovered its poise, according to Mr Bisenius.
“It’s been going very well,” he says. “When I look at the quality of business in 2009 and 2010 – the underlying attributes – the borrower credit profiles are good; there is a significant improvement in integrity of data.”
For example, the average loan-to-value percentage of a Freddie Mac single family mortgage was 99 per cent in 2007. That dipped to 70 per cent in 2008 and is expected to be lower again this year.
And Mr Bisenius believes that not just Freddie Mac, but the whole mortgage sector has undergone “overall, marked improvement”.
The British Bankers’ Association (BBA) says the UK banking sector’s reaction to its faults has been sweeping. Brian Capon, assistant director, says: “The UK has gone much further than virtually any other country in addressing the issues of safeguarding banking, for instance in the areas of capital, liquidity and remuneration.
“There is still work to do, but there has to be genuine international commitment and agreement on timescales and implementation to make it work.”
However, Mr Capon rejects the idea that the industry suffered from a general malaise of bad practice. “With hindsight, some of the decisions taken by some of the banks were wrong,” he says. “On the other hand, many others got it right.
“As is the case with any business, those who made the wrong decisions are no longer employed there. We should be learning from and building on the experience of those who were successful and that’s exactly what we’re doing.”
Training standards in banking came to attention, when it was revealed that Fred Goodwin, the former head of the now partly nationalised RBS, lacked formal qualifications.
However, the FSA’s subsequent investigation into qualifications at senior levels concluded present practice was sufficiently stringent, a conclusion the BBA supports.
“A successful business depends on a good team at the top,” says Mr Capon.
“The mix of a board will include a wide range of skills and it wouldn’t be realistic or appropriate to expect all board members to have the same qualifications. Banking covers a large range of specialist areas and those areas will have their own specific qualifications.”
According to the Financial Services Skills Council, the body that accredits UK banking qualifications and works with the industry to identify skills needs, training has climbed in importance.
“We have seen change,” says Sarah Thwaites, director for skills and development. “Anecdotally, since the economic crisis there has been more focus on training.
“Risk management is an important issue that all banks are now more focused on, so senior management understand risks.”
As well as informing employees on risk, there are other crucial training areas that the International Monetary Fund has identified.
“To minimise the occurrence and severity of crises, in addition to strengthening their capital and liquidity buffers, banks’ efforts need to be targeted to improve corporate governance, risk management systems, IT and reporting,” a fund representative says.
Getting more women into the higher ranks of banking is another priority at the FSCC, reflecting the suggestion that greater numbers of women on boards may have helped to balance decision making at the time of the crisis and avoid excessively risky decisions.
“We are looking at how to get more women into banking,” Ms Thwaites says. “Our programme, Through the Glass Ceiling, offers training and personal coaching for senior women and has proved to be very successful.”
As to the success of remedial actions banking has taken, Mr Bisenius is confident: “Generally, most changes have been sufficient.”